Week 8: Issues in State and Local Public Finance Guest Speaker: Betty Masuoka, Assistant City Manager, City of Sacramento –City revenues and expenditures –Major financing issues facing the City ICMA Case Studies School Finance E-commerce Eight-week evaluation

Case Study -- Developing the Tax Base Substantive Issues Competition for economic development, tax rates Strategies: annexation, attracting industry and jobs, redevelopment (tax increment financing, enterprise zones) Process/political Issues Long-run v short-run benefits Expertise v politics; professional v political incentives Old v new organizational culture -- professionalism Ethics (of omission and/or commission) Political Skill to avoid untenable choices

Case Study (cont.): LeBlanc’ s Choices 1.Present his cost-benefit analysis to Board in low-key way 2.Present his analysis to Board and express concern 3.Let someone else make presentation and keep quiet or don’t attend Board meeting 4.Revise cost-benefit analysis with rosier numbers Could he have avoided this situation?

Case Study: Estimating Revenues Substantive Issues City finances are heavily dependent on state economy There is always uncertainty in making revenue projections There are more and less sophisticated ways to estimate revenues. Is more “rationality” always best? Process/political Issues Politicians need to explain and communicate to citizens Conventional wisdom can be powerful There are political consequences to being right Ethics – when there’s no clear right or wrong

Case Study (cont.): Questions Raised How useful to the city manager is the consultant’s report? How should the manager deal with the uncertainty reflected in the range of revenue estimates? How should he present the information to the Council? What recommendations should he make with regard to layoffs and reserves?

Issues Raised by School Finance Generally Role of government –promote equality -- defined as: opportunity/quality/outcomes/revenue per effort? –public v private education –local choice issues Accountability –shows complexity of performance measurement –inputs and outcomes of public education –cause/effect knowledge Nature of citizen involvement in education issues

Effect of Serrano and Proposition 13 (PPIC Study) Decline in per pupil spending –due to end of subsidy by non-residential property owners? State finance has resulted in less inequality in revenue, but: –performance has declined –housing choices still reflect preferences for “better” schools Are problems caused by State financing of schools? –Do other factors affect performance? –Do other factors affect housing choice? Impact of financing v governance on school quality –disconnect between financing and governance –move to local financing or state control; not mixed

Taxation of E-Commerce Sales Tax and Income Tax issues “Nexus” -- connection between state and taxpayer –consumption v production/performance –physical v economic presence Reasons to support internet taxation –states have legitimate claim to revenues Reasons to oppose internet taxation –tax increase; hinders business climate Other issues –Enforcement issues –Definitional issues -- new kinds of transactions/services

Preview of Week 9 Part III: Practical Applications in Budgeting Back to Rubin, Ch 5 on tradeoffs and competition for $$ Practical chapter on budgeting in local government Department of Finance –Budget analysis –BCPs In class project on budget justification/analysis Class notes may not get posted (I’m in St. Louis until Tuesday)